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DJIA Down Big – Panic or Don’t Panic?

Market Update for February 5th, 2018

DJIA Down Big – Panic or Don’t Panic?

Okay, there are multiple issues that I just don’t like about this statement, yet news outlets are flashing this headline. I can already hear them tonight on the TV.

First, the Dow Jones Industrial Average (DJIA) is not the market. It’s an index of 30 stocks. Second, the primary reason the DJIA was down 1,597 points or 6.26% at one point today is thanks to program traders. How does that work? In short, once a price is hit on an index (or on other investment indicators) usually based on extreme movements, quantitative based trading programs automatically sell or buy. That happened at approximately 3:03 pm. Over the next 7 minutes the DJIA dropped over 860 points or 3.5%. That put the DJIA down nearly 6.3%. Good thing. The exaggerated selloff created a buying opportunity and the market recouped those 800 plus points before eventually closing the day down 4.6%. More importantly, the broader based S&P 500 (index of 500 companies) was down 4.1% for the day. The S&P 500 is now down approximately 0.92% for the year.

Reeding between the lines, let’s look at what is more important and really underlying all of this.

So, What Else is Going On?

In short, one of the reasons the markets sold off last week and again today is based on a quick year-to-date rise in interest rates. Ironically, a rise in interest rates is often a sign of a strengthening economy. Nonetheless, quick moves in rates can cause people to get nervous and fear that the economy is either growing too fast or that the Fed is choking off a sputtering recovery with higher interest rates. Aren’t these views contradictory? Yes. Welcome to the investment markets.

One way to check the health of the overall market is to see how the bond market held up on a day like today. On that front, it is a good sign that the 10-year Treasury responded favorably by increasing in price with its interest rate dropping from 2.84% to 2.71%.

As we also noted in our recent market commentary, rates tend to increase after tax cuts. Using 2003 as an example, we note that there was an increase in the 10-year Treasury rate from 3.1% to 4.6% with a corresponding equity sell-off of approximately 4.5% over six weeks. However, equities then climbed 15% higher over the next several months. While no periods are totally alike, this is good context for us today, particularly based on a strengthening economy and strengthening corporate earnings.

Source: Strategas Research Partners

Source: Strategas Research Partners

Economic Data Remains Favorable

Last week unemployment numbers beat expectations. The U.S. added 200,000 jobs and increased wages in the month of January. Unemployment remained at 4.1% as the U.S. continues to march towards “full employment.”

Corporate Earnings

With approximately 50% of S&P 500 companies reporting earnings, 75% have beaten “earnings” expectations and 80% are beating “revenue” expectations. The latter is particularly important as earnings can be manipulated, less so for revenues. According to FactSet, if 80% is the final number for the quarter, it will mark the highest percentage since FactSet began tracking this metric in Q3 2008. And, according to Strategas Research Partners, which had a recent 78% reading, this is much higher than the average of 59% since 2002.

Panic or Don’t Panic?

Don’t panic. Markets can be irrational. Using this as a premise and the fact that markets generally sell off in advance of recessions or in response to unexpected exogenous events, we aren’t overly concerned with today’s sell off. We consider this a healthy breather for the markets, which also gives us more attractive valuation levels. While we continue to focus on fundamentals, we cannot predict when corrections start or end.

As per our recent market commentary, we did predict that we would see more volatility this year. We wouldn’t recommend changing any strategic allocations based on recent events. Naturally, we will continue to monitor the markets and ferret out any other underlying issues that may be at hand.

Note:Investment advisory services provided through TC Wealth Partners, LLC, an investment advisor registered with the U.S. Securities and Exchange Commission. Trust services and retirement plan services are provided by the Trust Company of Illinois, a trust company chartered by the Illinois Department of Financial and Professional Regulation. This publication is prepared for general information. This material does not constitute investment advice as it does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should discuss this item with their TC Wealth Partners or Trust Company of Illinois advisor for relevant application to their specific situation. Any opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Investment involves risk and any statements regarding future prospects may not be realized as market conditions and trends fluctuate. Past performance is not necessarily a guide to future performance.

External Links:This page may contain External Links. By clicking on these links, you are leaving the TC Wealth Partners website and going to a third party site. We are not responsible for the products, services, and content provided on third party sites. We also cannot endorse or guarantee the information or recommendations provided on third party sites. To learn more about our Security and Privacy policies, please visit our Terms of Use section.

Welcome to“Reed Between the Lines”

The most basic meaning of the idiom “read between the lines” is “to perceive or detect a hidden meaning.” Its etymology is linked to an early method of transmitting code that hid secret information in invisible ink between the lines of a document. The recipient would then learn the information by reading between the lines.

“Reed Between the Lines” is a periodic market update and thought provoking commentary that digs at the deeper meaning behind wealth management and market behavior.

Note:Investment advisory services provided through TC Wealth Partners, LLC, an investment advisor registered with the U.S. Securities and Exchange Commission. Trust services and retirement plan services are provided by the Trust Company of Illinois, a trust company chartered by the Illinois Department of Financial and Professional Regulation. This publication is prepared for general information. This material does not constitute investment advice as it does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should discuss this item with their TC Wealth Partners or Trust Company of Illinois advisor for relevant application to their specific situation. Any opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Investment involves risk and any statements regarding future prospects may not be realized as market conditions and trends fluctuate. Past performance is not necessarily a guide to future performance.

External Links:This page may contain External Links. By clicking on these links, you are leaving the TC Wealth Partners website and going to a third party site. We are not responsible for the products, services, and content provided on third party sites. We also cannot endorse or guarantee the information or recommendations provided on third party sites. To learn more about our Security and Privacy policies, please visit our Terms of Use section.